Understanding If Passive Real Estate Investment Suits Your Portfolio

Discerning Whether Passive Real Estate Investment Suits Your Preferences

Thanks to the popularity of reality TV shows, many Americans believe that real estate investing involves purchasing properties, refurbishing them, and then selling them at a profit. Others assume it entails buying properties and leasing them to tenants annually to generate income.

Both methods are valid approaches to real estate investment, but they're not the only options. They are categorized as active methods of investing in real estate. There are numerous passive real estate investment methods that require less time and expertise. We'll examine the main three types of passive real estate investment strategies.

Is it Active or Passive?

Real Estate Investment Classification

When posing this question to a group of real estate investors, you'll receive a diverse array of responses. Based on my personal experience, I categorize real estate investments into three groups.

What is Active Real Estate Investing?

Active real estate investing involves investing in properties where you actively participate in construction, development, management, or renovation. Fix-and-flip projects and self-managed rental properties fall under this category.

What is Passive Real Estate Investing?

Passive real estate investing involves providing someone with your money, allowing them to handle all the work. Real Estate Investment Trusts (REITs) or real estate partnerships that don't require your active participation exemplify this approach. The primary characteristic of a passive investment is minimal effort required by the investor.

What is Active Real Estate Investing with Passive Management?

Active real estate investing with passive management combines elements of both. Researching and acquiring rental properties signifies an active investment. However, if you hire a property manager, the ongoing role becomes passive.

The lion's share of my real estate investment funds is allocated to this final category. I can attest to the fact that investing in buy-and-hold rental properties is hardly a completely passive endeavor.

Passive Investment Opportunities

Real Estate Investment Methods

Real Estate Investment Trusts (REITs) enable investors to pool their money to invest in commercial real estate. REITs encompass various types of properties, such as apartment buildings, office complexes, warehouses, shopping malls, and numerous other commercial properties.

REITs serve as a substantial vehicle for passive real estate income. These companies are required to distribute at least 90% of their taxable income to shareholders to avoid corporate income taxes.

Other publicly-traded companies having real estate-related businesses also provide passive investment opportunities. Real estate developers like The Howard Hughes Corporation and real estate-adjacent companies like Zillow and Redfin are prime examples.

Another possible way to invest passively in real estate is through crowdfunding. Platforms like Crowdstreet allow investors to pool their money to invest in individual commercial real estate projects.

For instance, a developer may utilize crowdfunding to purchase and renovate an apartment complex with the intention of selling it at a profit. Crowdfunding comes with disadvantages, such as limited liquidity and reliance on a single asset's success. However, the potential return is quite attractive.

Lastly, investing in real estate passively by partnering with other investors who wish to take an active role is a viable option. For example, one of my real estate investments is an LLC I co-own with two other investors. I'm the only one actively involved in the acquisition and management of properties, while the other two investors have no day-to-day involvement.

Passive Investment Advantages

Benefits of Passive Real Estate Investing

There are several reasons to opt for a passive real estate investment approach. Among them are:

You don't necessarily need extensive knowledge to invest in real estate passively. A fundamental understanding of investment analysis is adequate.
Passive real estate investing calls for fewer time commitments than active investing. For instance, assessing potential retail REITs will require less time than managing a retail property you purchase outright.
Passive real estate investing allows you to invest with minimal capital. You could purchase shares of a REIT or invest in a crowdfunding real estate deal with a few thousand dollars. Active property investing may require tens of thousands of dollars for a suitable property purchase.
Passive real estate investing offers the chance to put your money to work in ways you couldn't otherwise. For example, many individuals cannot afford to invest in urban high-rise apartment complexes. However, REITs and crowdfunding opportunities enable you to seize ownership of such an asset class.

Active Investment Benefits

Reasons to Adopt an Active Approach

The primary advantage of active real estate investing is the greater potential for higher returns. Purchasing rental properties or executing fix-and-flip projects involve higher rewards than most passive real estate investments.

Although this strategy comes with higher risk and an increased time commitment, ambitious and knowledgeable investors can reap substantial financial rewards by actively investing in properties.

Moreover, active investment strategies offer you control over your investments. With regard to rental properties and fix-and-flip projects, you hold ultimate decision-making authority. If you possess the skills and confidence, this can be a significant advantage.

What's the best fit for you?

Ultimately, there's no one-size-fits-all answer for every investor. Typically, passive real estate investments work better for the majority of investors. Many individuals struggle with making smart real estate purchases and sales independently, and they often lack the time necessary for active real estate investments.

However, if you're looking to actively participate in your investments and have a higher risk appetite, along with a desire to learn, then active real estate investing may be the right choice for you. But remember, it's wise to start small if you're a novice.

Real Estate Investing

Various investment options are available in real estate.

Commercial Real Estate

Acquiring a solid understanding of commercial real estate investment best practices can increase your chances of success.

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Generating Passive Income from Real Estate

Discover several strategies for generating passive income from real estate, including more hands-on opportunities and fully passive options.

The ideal real estate investment strategy for you might blend active and passive approaches. For instance, I have an equal allocation of funds in REITs and physical investment properties, and I entrust the day-to-day management to a property manager.

Before you outline your real estate investment strategy, reflect on your investment objectives, risk tolerance, and time availability. These considerations will aid you in deciding whether active or passive real estate investing is the best fit for you.

Matt Frankel holds positions in Howard Hughes and Redfin. Our website endorses Howard Hughes and Zillow Group. Our website advocates for Redfin and recommends the following option: selling short November 2024 $13 calls on Redfin. Our website has a disclosure policy.

In addition to the active and passive methods of real estate investment discussed earlier, another way to invest passively in real estate is through crowdfunding platforms like Crowdstreet. These platforms allow investors to pool their money to invest in individual commercial real estate projects, such as purchasing and renovating an apartment complex for profit.

When considering the advantages of passive real estate investing, one key benefit is the minimal capital required to get started. With options like REITs or crowdfunding, an investor can put money into real estate with just a few thousand dollars, compared to the tens of thousands needed for a direct property purchase.